BusinessDesk's investment editor, Frances Cook, responds to readers' emails on a weekly basis to answer various questions about money. Below you'll find her expert advice on a subject she's extremely passionate about.


Hi Frances,

This is a bit of an odd question. I'm considering divorcing my husband of 15 years (it won't come as a surprise to him BTW), but I'm terrified of the financial part of it. 

Don't get me wrong, it isn't that I think he will try to play me wrong or won't take financial responsibility for the children, and it is not that I am financially dependent on him (although he earns more than me, I do have a decent income to go on with life). It is rather the overwhelming idea of what needs to be done for both of us to become financially independent from one another in a fair and friendly manner, and without losing much money in the process. I don't even know where to start.

We share bank accounts, insurance, cars, and mortgage ... What do you do first? Do we sell the house we are living in? Do we get separate accounts? Do we separate insurances (life, health, house, cars)?

I'm not afraid of scaling down my lifestyle since I personally do not have a particular liking for luxury things, cars or houses; however, my significant other does have strong feelings about living a good life and for it to show (good cars, nice and big house, etc).

I know this is not a problem for me and only me to solve, but I feel I would be much better prepared to bring on the conversation about divorce if I knew what the next steps are towards becoming financially independent from one another.

Thanks!

M

 

Hi M,

Not an odd question at all. Divorce is something that is a reality for many people and can be complicated, not least on the financial side. 

I think the very first step is mental preparation. Divorce, unfortunately, has a way of bringing out the worst in people. Emotions run high, then you add money into the mix, and suddenly people can lash out in ways they never thought they would. 

I hope it’s as amicable a process for you as possible. But I think in these situations it’s a good idea to hope for the best and prepare for the worst. 

Do you have access to your own savings, in a bank account in your name, that your husband can’t access? I would recommend that everyone has one of these at all times, but particularly if you’re thinking about separation, now's the time it's needed. 

Joint accounts are vulnerable – a judge might freeze all joint assets while they're under dispute, or an upset partner might drain a joint account and put it into their personal account. 

Sure, you can try to get access to the funds again, but it may take months, sometimes even years. The courtroom process takes a long time. 

You want to be sure you can keep a roof over your head, food in your mouth, and the lawyer paid. Your own savings will be an important security in that regard. 

If you don’t already, it could be a good idea to start putting your pay from your job into a separate account that only you have access to.

Then I would suggest a stock-take of where you’re at. Do you know all the accounts, both personal and joint? Do you know where any investments are kept? 

Are there any overseas accounts or investments, and do you have access to them or proof of their existence? 

A spreadsheet or master document of everything you have, both together and separately, will help to clear your head and focus on what you need to do next. 

Even if you’re not interested in things like his car, put it into the spreadsheet, and put a fair value on it. It’s up to you how you want to negotiate any split of property, but you should start out with all the facts on the table, at least. 

It is, unfortunately, quite common for a partner to have accounts, investments or assets that you’re not aware of. Be methodical about going through the things that you do know about, and keep an eye out for any signs that there could be something else that you didn’t know about. Unexplained transactions out of a joint account, for instance, should be something to look into further. 

For where to start, I think it depends on what you want life to look like, post-divorce. You make a brief mention of children, so do you want them to be able to stay in the same house? That means one of you will need to buy out the other one, at a rate that everyone feels is fair. 

Or would it be easier for you all to get a fresh start, sell the house, split the cash and each buy somewhere new? The living situation will have a big impact on the family in terms of both lifestyle and finances, so I think that’s a good place to focus your energy first. 

Then will come the long process of gradually detangling everything else – insurance, cars, whatever else. Once you have that master document, it will help you to organise your priorities. 

Consider lifestyle impacts as well as financial ones. What will cause the biggest headache if it’s not sorted quickly? What do you want life to look like post-divorce, and what will you need to change to allow that to happen? What will need sorting eventually, but won’t cause too many problems if it’s further down the list? 

I reached out to a couple of experts to give you some more tips. Here’s what Bridgette Jackson, CDC Qualified Divorce/Separation Coach from Equal Exes had to say: 

“Custody and financial wellbeing considerations, especially when it comes to children, will form a big part of being prepared and organised. Other considerations that could affect planning around finances: 

  • Think about custody and how you want to build an amicable co-parenting relationship with your ex.  
  • Do you want equal custody or does one party have the children more, as they have been the main caregiver in the relationship? Consider that five out of six children will live with their mothers after divorce, so the financial effects on women and children are largely the same. Women suffer financially more than men after divorce because of unequal wages and earning capacity, and usually have more expenses associated with day-to-day physical custody.
  • Thinking ahead, what would happen if, for any reason, your husband stopped or reduced child support payments? 
  • You mention that your husband has a certain standard of living he wants to maintain. The cost of running two households and potential unforeseen expenses could bring issues in the future if it is felt that they negatively impact his standard of living. When doing your financial plan, you could also include considerations on how to mitigate this issue then.

It is vitally important and prudent for people who are thinking of separating or have made the decision to separate, to obtain pre-legal or legal advice. Being educated from a legal perspective goes hand in hand with the finances – being clear on topics such as spousal maintenance, child support and economic disparity all have financial implications for the whole family. 

Second is the critical conversation you will need to have with your husband. It is best to rehearse what you want to say, and being your best self in the process starts with this conversation. This conversation can be critical in terms of how you navigate the next steps. Regardless of whether it will be a surprise, it is still an emotional time and it is natural for money and how the decision will financially impact you both, to be top of mind.

Third is to have the support of professionals and carefully chosen family and friends. Going through a divorce is emotionally, physically and mentally draining.

There will be some people who might not understand your situation – they may make you feel alienated. For that reason, it is important to choose your support system during divorce wisely. You deserve to get the support you need as this is fundamental to your divorce recovery. Spend more time with your trusted and supportive family members and friends. Be wary of and avoid those who are toxic and escalate the conflict between you and your ex-partner. 

Last words are: ‘Never disparage your ex and look to be your best self in the process.'

And Brigette Arnold, Financial Adviser at Cambridge Partners, had these recommendations: 

  1. Determine what you own and what you owe. This is also a good time to assess which finances and assets are held in joint names and which are held in individual accounts. 
  2. Debt. It is important to understand the type of debt you have, both jointly and individually, and to compare these against your assets. 
  3. Income. Understand what income streams you have, and how much these income streams are, will help you to develop a plan going forward. Income streams include salaries or wages, but also include income generated off assets, for example, these would include rental property, a business or shares in a company. Don't be put off if your husband has managed these assets previously. It may well be outside your knowledge or comfort level, however, it will be in your best interests to retain involvement – at some level – in these assets.
  4. Expense tracking. Before you start drawing up a budget, you need to understand your money coming in, and where it goes to. The perfect place to start is by looking at your bank statements. 
  5. Your own bank account. The next step is to set up your own bank account, with a different bank, if you do not have one already.

Best of luck with the separation, if you decide to go ahead with it. I hope it is as friendly and painless as possible. 

 

Hi Frances, 

Can I pick your brain? We are investing in the stock market here and abroad, and my wife and I are planning to buy a house in Auckland within two years. 

Our question is, is it worth it to sell ALL our shares to boost our deposit? In saying that, we may not be able to go back to investing again once we have a mortgage so we can focus on the repayments. Just want to know your opinion on this.

Regards, 

M


Hi M

My answer depends a bit on how much money you have, and what your lifestyle priorities are. 

You mention that you want to “boost” your deposit. Do you need to sell your shares to get a 20% deposit, or would this be selling your shares to go much further, and have something like 30% or 40%?

In almost all situations, you want a 20% deposit for your home, if possible. There are ways to get a house with less, sometimes with only 5% down. But you’ll pay extra for the privilege, with the bank often charging higher fees, and a higher interest rate, until you hit that 20% mark. If liquidating all your shares is the only way to get there, and you want to buy a house, then it seems like you don’t have much choice in this. You would simply be doing what needs to be done to get over the line. 

However, if you’re just debating whether you would like a higher deposit, and possibly get more equity in your home, then it comes down to a decision on your relationship to debt, your goals for the future, and what type of financial assets you want to build up. 

Having higher equity, and being one step closer to owning your home outright, gives peace of mind and security. You could be mortgage-free several years earlier, which greatly reduces a core life expense, and could give you the freedom to reduce your hours at work, go travelling, or take up an expensive new hobby. 

If life hit you with a nasty financial curveball, you at least wouldn’t need to worry so much about what the bank would say about it. You wouldn’t have the added stress of keeping a roof over your head.

You would also pay less to the bank overall. The faster you pay off a home, the more you will save on interest. You essentially pay twice for a house, once in purchase price, and then often the same amount again in interest payments over the lifetime of the loan. 

But any extra payments you make come straight off the original loan amount, and you save all the interest it would have cost you over 30 years. It’s bigger than it seems at first. Each dollar that you pay off early could actually be worth two dollars, because of all the interest that you won’t have to pay to the bank. 

However, a home essentially traps your cash. You can’t sell off just one room of it if you suddenly need funds, whereas shares give regular income from dividends, and you can sell just a few if you need some money. 

You also need time on your side to get the most out of shares. You want them to be increasing in value, earning dividends that you can reinvest, and those profits then going on to earn even more for you. 

Compounded returns are like a rolling money snowball, where you let it roll along for long enough and soon it’s grown out of all proportion to what you had originally. But it does need time.

My personal approach is to split things 50/50 between extra mortgage payments and investing for the future. I think it gives the best of both worlds. 

You certainly want to ensure you have at least a 20% deposit for your home, to get those better interest rates and reduced fees from the bank. But once you’re over that threshold, I would consider splitting the rest of your assets so that some go towards the mortgage, and some are creating an income stream for the future. 

However, I've hopefully given you enough information here that you can weigh it up for your own lifestyle priorities. The security of having a paid-off home as soon as possible might be more important. Passive income from shares might be more important. A bit of both might appeal. 

There are pros and cons to all of these strategies, and the deciding factor will be what works for your own values. 

As a last aside, you mention that you’re not sure that you’ll be able to keep investing once you have a mortgage. You know your budget better than I do, but can I suggest that even investing a small amount is worth it – $5 a week is better than $0 a week. 

It’s not pointless either, as over 30 years that $5 per week builds to $22,670.59. Only $7,200 of that would be money that you put in yourself – $15,470.59 of that is compounded returns, a.k.a. pure lazy profits. That’s a conservative number, assuming a 7% average yearly return, which is designed to take into account fees, tax, and inflation, so it would be equivalent to $22,670.59 of today’s money.

As you pay off that mortgage and get a few more pay rises under your belt, you may be able to increase how much you’re investing. You’re more likely to increase an amount that you’re already contributing than you are to start again from a stopped position.

Good luck with the Auckland house hunt, I hope it goes well for you. 

Send questions to answers@businessdesk.co.nz if you want to be featured in the column. Emails should be about 200 words, and we won't publish your name. Unfortunately, Frances is not able to respond to every email received, or offer individual financial advice.

Information in this column is general in nature, and should not be taken as individual financial advice. Frances Cook and BusinessDesk are not responsible for any loss a reader may suffer.